Steps Employers Can Take Before a Reduction in Force to Help Protect Trade Secrets

  • Layoffs may create an increased risk of trade secret misappropriation.
  • Employers can take certain steps in advance of a reduction in force to help mitigate against this risk.

Layoffs are here and with them comes an often-overlooked threat: trade secret misappropriation.  Thousands of tech workers have been laid off over the last year, and 61% of business leaders say their organizations will likely have layoffs in 2023.1  Businesses reducing force face hard operating decisions as well as the requirements of an ever-expanding body of laws and regulations.  With so much to consider, employers often overlook the threat that departing employees can pose to the trade secrets that form the very lifeblood of an organization.  85% of trade secret theft is committed by employees or business partners.2  When employees leave, especially involuntarily, there is significant risk that they may retain the employer’s trade secret materials.  Of course, such retention would likely violate both contractual and legal obligations, but pursuing such claims in litigation would be an expensive and time-consuming remedy.  Below we outline some steps that employers can take proactively to help avoid harm from departing employees’ retaining trade secrets.

Educate Employees

Despite signing contracts that define and protect trade secrets and confidential information, many employees remain unaware of their obligations and how serious the consequences can be for violating them.  An employee bent on revenge may not care whether what they are doing is wrong, but many employees end up retaining trade secret information out of ignorance rather than malice—they simply do not realize that they are not permitted to keep the documents they worked on.  It will typically not be possible to hold an educational session in the middle of a reduction in force, but measures such as yearly training sessions, consistently instituting disciplinary action for failure to maintain confidentiality during employment and creating a culture that emphasizes the critical role of trade secrets at the company can reduce the threat of unknowing misappropriation.

Update Contracts Regularly

Laws and regulations involving trade secrets and unfair competition are constantly changing, as shown by the FTC’s recent rulemaking efforts.  To ensure that contracts offer as much protection as possible without running afoul of changes in the law, employers should review their employment contracts at least yearly.

In view of the National Labor Relations Board’s recent decision in McLaren McComb, 372 NLRB No. 58 (2023), employers may wish to review their contracts and policies limiting the disclosure of “confidential information” to ensure they do not prohibit non-managerial, non-supervisor employees from exercising their rights under the National Labor Relations Act. This includes the right to discuss their wages, hours, and terms and conditions of employment with both employees and non-employees. Also, these rights are not limited to unionized employees. What to consider in reviewing and evaluating the risks associated with “confidential information” policies and agreements is discussed here.

Restrict Access During Employment

Employees cannot take trade secret information if they do not have access to it.  Of course, no business can simply lock away its trade secrets and still function—in order for those trade secrets to offer value, some employees must be able to access and use them.  Nonetheless, employers can reduce their risk by implementing IT protocols that permit access to trade secret documents by specified employees only and by maintaining company policies that restrict such access to only documents necessary for the specific employee’s duties.

Monitor for Misappropriation

IT departments can often set up systems capable of monitoring for warning signs of misappropriation.  Such indicia might include downloading numerous files at the same time, accessing company file repositories at unusual hours, connecting to non-work email and cloud storage sites, plugging in non-work external storage devices, and running anti-forensic software designed to cover the user’s electronic trail.  As always, these protocols will need to be balanced against the business’ need to stay flexible and permit employees to access data necessary for their jobs, but such monitoring can be a useful tool in identifying potential misappropriation before documents go out the door.

Remove Access on Termination

Employees who have recently been terminated often pose a greater risk to trade secrets.  Reductions in force should be planned so the affected employees’ access to company documents and emails is cut off immediately upon the announcement of their termination.  Companies with sophisticated IT capabilities may also institute regular remote backups of employee computers so those computers can be wiped at the time of termination without losing any data (including potential evidence of pre-termination misappropriation).

Conduct Exit Interviews

Exit interviews can be unpleasant, but they can also be a source of intelligence for identifying and addressing misappropriation risk.  Interviews provide the employer with a final chance to educate employees with regard to their continuing obligations with the company.  They also allow an employer to assess the risk of an employee’s violating those obligations. 

Consider Severance Agreements

While severance agreements are not appropriate for all situations, they can be a useful tool for incentivizing employee cooperation after termination.  In the trade secret context, a severance agreement can include a requirement that the exiting employee search physical and electronic file repositories for any company documents, return those to the company, and permanently destroy any copies.  A severance agreement can also provide a last opportunity to update the employee’s duties with regard to confidential information and unfair competition, especially if the company’s employment documents have not been recently refreshed. Although it is beyond the scope of this publication, employers must be careful that their limitations on the disclosure of “confidential information” do not prohibit non-managerial, non-supervisor employees from exercising their rights under the National Labor Relations Act, which includes the right to discuss their wages, hours, and terms and conditions of employment with both employees and non-employees, including the terms of the severance agreement itself. 

Preserve Evidence

When employees leave, businesses often feel pressure to repurpose their devices and eliminate their accounts—the purpose of layoffs is to reduce overhead, after all.  But a small investment in preserving these repositories for a period of time can often be the difference between suspecting trade secret misappropriation and being able to prove it.  Not all businesses will be able to do so, but if feasible it can be good practice to determine whether there are cost-effective ways to temporarily preserve these repositories, which could run the gamut from creating forensic images of the devices to simply storing them in a locked cabinet.

All businesses have good reason to protect their trade secrets during times of turnover, but since no two businesses are the same, the suggestions above may work for some businesses but not for others.  If your business is considering a reduction in force, the only evergreen advice is to work with experienced counsel in planning, preparing for, and conducting the terminations to ensure that the company and its trade secrets are protected as effectively as the circumstances permit.

See Footnotes

Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.